**EXHIBIT10.4**

 

TOROTEL, INCDIRECTORS STOCK APPRECIATION RIGHTS PLAN

 

1.               PURPOSE

 

The purpose of the Torotel, Inc. DirectorsStock Appreciation Rights Plan (the “Plan”) is to aid Torotel, Inc. (the “Company”)in attracting and retaining directors of outstanding competence, dedication andloyalty.  Consistent with this objective,the Plan provides for the grant of Stock Appreciation Rights (“SARs”) tonon-employee directors pursuant to the terms and conditions hereinafter setforth.  As used herein, the term “Subsidiary”means any domestic or foreign corporation, at least 50% of the outstandingvoting stock or voting power of which is beneficially owned, directly orindirectly, by the Company.

 

2.               EFFECTIVE DATE

 

The Plan was approved by the Board ofDirectors of the Company (the “Board of Directors”) and became effective on October 1,2004 (the “Effective Date”).

 

3.               ADMINISTRATION

 

The Plan shall be administered by theCompensation Committee of the Board of Directors or such other committeeappointed by the Board of Directors (the “Committee”).  The Committee will consist of three or moredirectors who may also be eligible to participate in the Plan.

 

4.               ELIGIBILITY

 

SARs under the Plan shall be granted only topersons who are directors of the Company. No SARs under the Plan shall be granted to any person who is an employeeof the Company or a Subsidiary.

 

5.               GRANT OF SARs

 

SARs shall automatically be granted pursuantto the terms of this Section without further action by the Board ofDirectors.  The date on which SARs aregranted hereunder shall be referred to herein as the “Date of Grant.”

 

5.1         On the Effective Date, each person serving asa director of the Company, who is eligible to participate, shall be granted20,000 SARs.

 

5.2         On each May 1 following the Effective Dateduring the term of the Plan, each person serving as a director of the Companyon such date, who is eligible to participate, shall be granted 10,000 SARs.

 

5.3         Each person who is elected as a director ofthe Company, who was not a director of the Company on the Effective Date, andis eligible to participate, shall be granted 10,000 SARs on the date suchperson is elected a director.

 

5.4         AllSARs granted pursuant to the Plan shall have a SAR Grant Price determinedpursuant to Section 7.1 hereof.

 

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6.               AVAILABLE SARs

 

6.1         The stock subject to the SARs granted underthe Plan shall be the Common Stock, $.01 par value, of the Company (“CommonStock”).  Each SAR shall be deemed toequal one share of Common Stock, and except as otherwise required or permittedby Paragraph 6.2, the aggregate number of SARs which may be granted under thePlan shall not exceed 500,000.  If a SARexpires, terminates, is forfeited or is otherwise surrendered, in whole or inpart, the Shares allocable to such SAR shall again become available for SARsunder the Plan.

 

6.2         The aggregate number of SARs pursuant to theprovisions of the Plan shall be proportionately adjusted for any increase ordecrease in the number of issued shares of Common Stock resulting from anystock dividend, stock split or similar event and may, in the sole discretion ofthe Board of Directors of the Company, be similarly adjusted for any othercapital adjustment (including a reclassification of shares or recapitalizationor reorganization of the Company) or the distribution to holders of shares ofCommon Stock of rights, warrants, assets or evidences of indebtedness.

 

7.               TERMS ANDCONDITIONS OF SARs

 

Each SAR granted pursuant to the Plan shallbe evidenced by a written agreement (the “Agreement”) between the Company andthe person to whom the SAR is granted (the “Grantee”) in such form or forms asthe Committee, from time to time shall prescribe, which shall comply with andbe subject to the terms and conditions of this Paragraph 7.  In addition, the Committee may, in itsabsolute discretion, include in any such Grant, other terms, conditions andprovisions that are not inconsistent with the express provisions of the Plan.

 

7.1         *SAR GrantPrice. *The initial price atwhich each SAR may be granted on the Effective Date shall be thirty-five cents($.35).  Thereafter, the price at whicheach SAR is granted under the Plan shall be the average of the closing pricefor shares of the Common Stock for the ten consecutive days immediatelypreceding the Date of Grant.  The priceat which a SAR is granted is the “SAR Grant Price.”  Notwithstanding the foregoing, if the numberof shares of Common Stock subject to any SAR is adjusted pursuant to Paragraph6.2 hereof, a corresponding adjustment shall be made to the SAR Grant Price.

 

7.2*         Duration of SARs. *Each SAR granted under the Plan shallexpire and all rights pursuant thereto shall cease on the date that shall bethe tenth anniversary of the Date of Grant (the “Expiration Date”).

 

7.3*         Vesting of SARs. *Each SAR granted hereunder may beexercised to the extent that the Grantee is vested in such SAR.  The SARs will vest according to the followingschedule:

 
| **Number of Years the Grantee has remained  a director of the Company following  the Date of Grant** | ** ** | **Shares represented  by a SAR in which  a Grantee is Vested** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                           | ** ** |
| ** **                                                                                           | ** ** |
| Under one                                                                                            |       | 0                                                              | %          |
| At least one  but less than two                                                                      |       | 33                                                             | %          |
| At least two  but less than three                                                                    |       | 67                                                             | %          |
| Three or  more                                                                                       |       | 100                                                            | %          |

## ** **

## ** **

Anythingcontained in this Paragraph 7.3 to the contrary notwithstanding, a Grantee shallbecome fully (100%) vested in each of his or her SARs under the followingcircumstances:

 

(i) upontermination of the Grantee’s service as a director of the Company for reasonsof death, Disability or Retirement (as such terms are defined in Paragraphs 7.7.4and 7.7.5);

 

(ii) ifthe Committee, in its sole discretion, determines that acceleration of the SARvesting schedule would be desirable for the Company; or

 

(iii) if such SARsvest pursuant to Paragraph 7.4.

 

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7.4         *Merger,Consolidation, Etc. *If theCompany shall, pursuant to action by its Board of Directors, at any timepropose to merge into, consolidate with, or sell or otherwise transfer all orsubstantially all of its assets to another corporation, and provision is notmade pursuant to the terms of such transaction for the assumption by thesurviving, resulting or acquiring corporation of outstanding SARs or forsubstitution of new SARs therefore, the Committee shall cause written notice ofthe proposed transaction to be given to each Grantee not less than twenty daysprior to the anticipated effective date of the proposed transaction, and his orher SARs shall become fully (100%) vested and, prior to a date specified insuch notice, which shall be not more than ten days prior to the anticipated effectivedate of the proposed transaction, each Grantee shall have the right to exercisehis or her SARs.  Each Grantee, by sonotifying the Company in writing, may in exercising his or her SARs, conditionsuch exercise upon, and provide that such exercise shall become effective atthe time of, but immediately before, the consummation of the transaction.  If the transaction is consummated, each SAR,to the extent not previously exercised before the date specified in theforegoing notice, shall terminate on the effective date of suchconsummation.  If the transaction isabandoned, (i) any SAR not exercised shall continue to be available forexercise in accordance with other provisions of the Plan; and (ii) to theextent that any SAR not exercised before such abandonment shall have vestedsolely by operation of this Paragraph 7.4, such vesting shall be deemedannulled, and the vesting schedule set forth in or pursuant to Paragraph7.3 shall be reinstituted, as of the date of such abandonment.

 

7.5         *Exercise ofSARs. *A person entitled toexercise a SAR may exercise it to the extent vested pursuant to Paragraph 7.3in whole or in part during a thirty (30) day period beginning on the firstbusiness day following the end of the Company’s fiscal year end occurring afterthe Directors termination of service by delivering to the Secretary of theCompany written notice (the “Notice”) specifying the number of SARs beingexercised.  Upon exercise of a SAR by aGrantee, the Company will pay the Grantee an amount (the “Spread”) equal to theexcess of the Exercise Price over the SAR Grant Price multiplied by the numberof shares represented by the SAR or portion thereof being exercised.  The “Exercise Price” shall be the average ofthe closing price of shares of Common Stock for the ten consecutive daysimmediately preceding the Notice. Payment by the Company upon exercise of a SAR shall be in the mannerprovided below.

 

7.5.1                        TheCompany shall pay up to $10,000 in cash to the Grantee, subject to anyapplicable tax withholding provisions, within ten business days after theexercise of the SAR.

 

7.5.2                        TheCompany shall have the option to make any payments that exceed $10,000, inquarterly payments over three (3) years with interest payable quarterly at thePrime Rate of Company’s main Bank.

 

7.6         *Non-transferability. *SARs shall not be transferableother than by will or the laws of descent and distribution and may beexercised, during the lifetime of the Grantee, only by the Grantee.

 

7.7         *Terminationof Service as a Director. *Unlessotherwise determined by the Committee, the following rules shall apply in theevent of Grantee’s termination of service as a director of the Company.

 

7.7.1                        Except asprovided in Paragraph 7.7.4 or 7.7.5, in the event of a Grantee’s terminationof service as a director of the Company either (1) as a result of his removalas a director for cause; or (2) as a result of resignation of the director, hisor her SAR’s should immediately terminate.

 

7.7.2                        In theevent of the Grantee’s termination of service as a director under circumstancesother than those specified in Paragraph 7.7.1 hereof and for reasons other thanDeath, Disability (as defined in Paragraph 7.7.4) or Retirement (as defined inParagraph 7.7.5), his or her SARs shall terminate on the date which is 90 daysfrom the date of such termination of service as a director or on its ExpirationDate, whichever shall first occur; *provided,however,*that if the Grantee is subject to the provisions of Section 16(a)of the Exchange Act on the date of termination of service as a director, suchSARs shall terminate on the date which is the end of the first Window Periodfollowing the later of 90 days from the date of such termination of service asa director, or six months and ten days after the date of Grant of such SARs, oron its Expiration Date, whichever shall first occur.

 

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7.7.3                        In theevent of the death of a Grantee while he or she is serving as a director of theCompany, his or her SAR shall terminate on the first anniversary of the Grantee’sDeath or on its Expiration Date, whichever shall first occur.

 

7.7.4                        In theevent of the Grantee’s termination of service as a director due to mental orphysical infirmity (“Disability”), his or her SAR shall terminate on firstanniversary of such Disability, or on its Expiration Date, whichever shallfirst occur.

 

7.7.5                        In theevent that the Grantee’s service as a director terminates after five or moreyears of service as a director (“Retirement”), his or her SAR shall terminateon the second anniversary of the date of such Retirement or on its ExpirationDate, whichever shall first occur.

 

7.7.6                        Anythingcontained in this Paragraph 7.7 to the contrary notwithstanding, a SAR may onlybe exercised following the Grantee’s termination of service as a director forreasons other than Death, Disability or Retirement if, and to the extent that,such SAR was exercisable immediately prior to such termination service as adirector.

 

7.8         *No Rightsas Stockholder or to Continue as a Director. *No Grantee shall have any rights as a stockholder, andneither the Plan nor any SAR granted under the Plan shall confer upon a Granteeany right to continue to serve as a director.

 

8.               TERM OF THE PLAN

 

Unless the Plan has been sooner terminatedpursuant to Paragraph 9 hereof, the Plan shall terminate on, and no SARs shallbe granted after the tenth anniversary of the Effective Date.  The provisions of the Plan, however, shallcontinue thereafter to govern all SARs theretofore granted, until the exercise,expiration or cancellation of the SARs.

 

9.               AMENDMENT ANDTERMINATION OF PLAN

 

The Board of Directors at any time mayterminate or suspend the Plan or amend it from time to time in such respects,as it deems desirable.  Provided furtherthat, subject to the provisions of Paragraph 8 hereof, no termination of oramendment to the Plan shall adversely affect the rights of any participantwithout the consent of such participant, as the case may be.  In addition, the provisions of the Plan shallnot be amended more than once every six months, other than to comport withchanges to the Internal Revenue Code of 1986, as amended, the EmployeeRetirement Income Security Act of 1974, as amended, or the rules there under.

 

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